How interest rate hikes affect borrowers

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Watching interest rates start to rise is like “waiting for the guillotine to fall,” says Nick.

He and his wife’s home loan repayments jump from $1,700 a fortnight to around $2,350, a jump of $650.

Given that they have just reset their mortgage payment terms on their two Wellington homes, today’s decision by the Reserve Bank of New Zealand to raise the official exchange rate by 50 basis points to 2% will not affect it immediately.

But with part of their mortgage payments due to be renegotiated in a year’s time and New Zealand in the throes of rising costs of living, Nick is dreading what his next mortgage bill will look like.

“If our salaries can’t keep up with that, obviously it’s going to get tighter and tighter until there comes a time when no budget will work,” he said, not wanting his name to be. family be published.

“Besides, I have no idea what you’re doing.”

It is a pressure that is felt across the country.

The Reserve Bank’s objective in increasing the official exchange rate is to curb the rise in the cost of living.

He will have to apply just enough pressure on the money supply over the next few months to cool demand and rein in inflation, but not enough to kill demand and stall growth, said NZ Herald economics columnist Liam dan.

If it raises the OCR too hard and too quickly, it can deliver a severe blow to economic growth that could tip the economy into recession.

Nick isn’t sure what he and his wife will do if their salaries don’t keep up with the rising cost of living and interest rates. Photo/Mark Mitchell

“It’s a tricky balancing act,” Dann said.

Still, no matter how fast or slow, most experts predict that more OCR increases will take place in the near future, meaning more Kiwi owners will face interest repayments. on higher home loans.

Nick is estranged from his wife, and the couple own a house she lives in and an apartment Nick lives in.

They share a son and are determined to keep both properties to take care of him.

Nick has a boarder in one bedroom of his apartment and shares the other bedroom with his son when caring for him.

And with just under $1 million in joint debt, he said he was grateful he didn’t have a bigger mortgage.

A year or two ago banks were lending ‘crazy sums’ and many people tended to get the most they could afford and didn’t leave themselves much ‘wiggle room’, he said. declared.

Originally, he and his wife were looking for another, more expensive second property and got a home loan approved by the bank to buy it, he said.

However, the poor seismic rating of this house led the couple to forgo the deal and instead find their current apartment for less.

When their mortgage terms were recently renegotiated, he and his wife were advised to put all their loans on fixed terms of two years so they could benefit from today’s low interest rates, instead of cope with higher rates expected in the future.

They decided to put one loan on a fixed two-year term and then split the other loan between a two-year term and a one-year term.

The idea was that having a quarter of their overall debt on the lower interest rates of the one-year term would make the immediate fortnightly jump in their repayments a little more manageable.

“Somehow we managed to budget so we could absorb this massive $650 fortnight increase,” Nick said.

“But it’s not like we have $650 more in our pockets, and I can imagine for a lot of people $100 or $200 raises would be impossible to accept.”

– by Ben Leahy, NZ Herald

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